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Saturday, April 28, 2012

Just before the United States invaded Iraq in 2003, I was debating the matter with a friend, a multi-millionaire entrepreneur.

"Of course we should invade," he said. "The Middle East can't get any worse, so if you change something, it's bound to get better."

I don't know what surprised me more: The weirdness of his argument or his certainty in expressing it. He was suffering from what I now know as the "CEO fallacy": The belief that if you have run a successful company, you can run a country.

Mr Mitt Romney's campaign for US President rests on the CEO fallacy. As he says: "Other people in this race have debated about the economy ... but I've actually been in it."

The CEO fallacy is a fallacy. To quote Mr Larry Summers, former adviser to President Barack Obama, now professor at Harvard's Kennedy School: "The idea that you can extrapolate from the one-business level to the national economy seems to me a profound confusion."

The CEO fallacy goes like this: Successful business people ran tight ships and made money. We, the country, want to run a tight ship and make money. Business types know how and so they should rule.

It's why early admirers of Mr George W Bush's administration called it "the CEO presidency". The UK government wouldn't have let a professor of mediaeval literature review the oil sector, but it got Mr John Browne, former head of BP, to review British higher education.

In the CEO fallacy, the chief executive typically presents a selective biography in which he pulled himself up by the bootstraps in a perfectly free market, something more people could do if only "government would get out of the way".

The CEO fallacy is relatively new. For centuries, soldiers and clergymen ran states.

Perhaps the shift began in 1974, when an obscure gathering of business types in Davos, the European Management Forum, first invited some politicians. Gradually, in the Reagan-Thatcher era, business became redefined as "the real world". Davos is now where CEOs tell politicians how to run the world.

But the politicians should be careful. A company isn't like an economy. Mr Stefan Szymanski, my economics guru at the University of Michigan, says: "Most economists would be pretty adamant that that is a poor analogy."

The analogy fails for many reasons but, above all, running an economy - let alone a country - is of a different order of complexity to running a firm. A CEO typically only has one target: To make a profit. A President has many targets.

Complexity researcher Vince Darley adds: "Running most companies, you are trying to do one thing extremely well. You've got one main product or one main customer base. An economy is much more intricate. You're looking to do hundreds of things, some of them conflicting."

Mr Darley notes that when businesses attempt multiple things, they often fail. That's why conglomerates went out of fashion. Many companies cannot even survive small changes in their one niche.

When Mr Romney ran companies, he cut costs. But as Mr Summers notes, that doesn't work for whole economies. If one firm cuts costs, it benefits. If all firms cut costs, the economy shrinks and nobody benefits.

Could CEOs make governments more efficient? Mr Darley replies: "Companies try to get the best deal, the best bang for the buck, but that's not really what being a President is about. He's the strategic force. Those efficiency skills would be great to have in the middle management of the federal bureaucracy."

Indeed, when successful peanut farmer Jimmy Carter brought his skills to the presidency, he ended up a feared micro-manager who even supervised the schedule for the White House tennis court.

The CEO fallacy is related to the "money fallacy": The notion that life is a race to make money and that rich people, therefore, possess special wisdom.

This was nicely expressed in an argument tossed around during Occupy Wall Street: People with time to protest must be losers whose views didn't matter.

The money fallacy has recently propelled various Goldman Sachs alumni to high public office, from Mr Mario Monti in Italy to Mr Mario Draghi at the European Central Bank and Mr Jon Corzine, the former New Jersey Governor. The collapse of Mr Corzine's MF Global Fund couldn't dent the money fallacy, just as the CEO fallacy has outlived former Prime Minister Silvio Berlusconi's reign in Italy.

In fact, both fallacies have become more popular as voters tire of professional politicians. Oddly, Mr Romney does have relevant experience for the presidency: He was a respected Governor of Massachusetts. But he cannot mention that because he introduced universal healthcare there. Still, given popular confusion, the CEO fallacy might carry him all the way. The Financial Times LimitedSimon Kuper is a columnist with the FT.

Thursday, April 26, 2012

Most criticism of government profligacy in Europe lately has focused on the obvious sinners, such as Greece. When it comes to overspending on social welfare though, Europe has no angels.

Even the "good" Scandinavians and governments that appeared to be in sound fiscal shape in 2008, but were then undone by unsustainable private-sector debts, were spending too much and will have to restructure.

The only question is whether this will be done gradually, or via shock therapy.

Take the four countries at the epicentre of the euro-area crisis: Greece, Ireland, Portugal and Spain. They are in many ways different but they have three important characteristics in common.

First, total debt in these countries expanded rapidly throughout the past decade - either because of increased government borrowing (Greece and Portugal) or through a rapid build-up of private debt (Ireland and Spain). Second, they all ran substantial current-account deficits in the years before the crisis. Third, government spending in those nations grew at remarkably high rates.

In Greece and Spain, nominal spending by the state increased 50 per cent to 55 per cent in the five years before the crisis started, according to my calculations based on government data. In Portugal, public expenditure rose 35 per cent; in Ireland, almost 75 per cent.

BUBBLE TROUBLE

Clearly, the welfare-state expansion in Greece and Portugal was part of the reason these two countries ended up as clients of Europe's bailout mechanisms. But Ireland and Spain had problems with the rapid expansion of the state too.

A big part of rising affluence during the boom years was generated by escalating real-estate bubbles which caused private debt to soar. They boosted the construction sectors and, more generally, pushed domestic consumption to the point where Spain had to borrow as much as 8 per cent of gross domestic product (GDP) every year to finance its current account deficit.

Like other bubbles, they spearheaded economic growth, which allowed governments to expand the state rapidly.

That growth vanished and gold turned to sand. Simply put, the bubble-fuelled prosperity wasn't sustainable. A record of solid fiscal surpluses was quickly turned into high structural deficits. Spain, for instance, entered 2008 with a budget surplus of slightly more than 2 per cent and ended 2009 with a structural deficit of 9 per cent.

RISING PENSION BILLS AND THE CRISIS

This has been a familiar story during the crisis. Yet surprisingly few people in Europe have bothered to understand the role that the welfare state played in creating it.

Take as an illustration the average Spanish pensioner. Until recently, he received a state pension that was more than 80 per cent of the average salary of current earners. So when the economy was growing strongly, salaries and, therefore, pensions did too. That might not be a problem if wages (and pensions) were to fall again when the economy shrank - but that doesn't usually happen.

Instead, the pension bill tends to remain at the same elevated levels even as economic growth and government revenue fall, creating an unaffordable ratchet effect.

Europe's crisis economies will now have to radically reduce their welfare states. State spending in Spain will have to shrink by at least a quarter; Greece should count itself lucky if the cut is less than a half of the pre-crisis expenditure level.

EXPECT CHANGES

The worse news is that this is likely to be only the first round of welfare-state corrections. The next decade will usher Europe into the age of ageing, when inevitably the cost of pensions will rise and providing healthcare for the elderly will be an even bigger cost driver.

This demographic shift will be felt everywhere, including in the Nordic group of countries that has been saved from the worst effects of the sovereign-debt crisis.

Germany, for example, still has an underfunded pension system. One study has projected that on current population- and spending-growth trends, healthcare expenditure would account for 15 per cent of Germany's GDP by 2025 and almost 26 per cent by 2050.

Europe's social systems will look very different 20 years from now. They will still be around, but benefit programmes will be far less generous and a greater part of social security will be organised privately. Welfare services, like healthcare, will be exposed to competition and, to a much greater degree, paid for out of pocket or by private insurance.

The big divide in Europe won't be between North and South or left and right. It will be between countries that diligently manage the transition away from the universal welfare state that has come to define the European social model and countries that will be forced by events to change the hard way. BLOOMBERG

Fredrik Erixon is director of the European Centre for International Political Economy, a research group in Brussels.

Social model is Europe's solution, not its problemApr 24, 2012by Paul Fourier

In the wake of the financial crisis, Europe's leaders are calling the continent's social model into question - it is "done", according to European Central Bank (ECB) President Mario Draghi. That's a travesty.

The crisis is, above all, financial. Yet governments aren't addressing the malfunctions that caused this problem. Instead, they are forcing ordinary people to pay and attacking the social systems that support them.

Take the example of Greece. The country is being pushed to accept an austerity plan of unprecedented severity, predicated on reducing public spending and slashing salaries, pensions and social systems in the most brutal way. This has forced the country into an economic, social and political crisis that will last for many years.

These policies are initiated not by Greeks but by European Union officials in Brussels, at the ECB in Frankfurt, or in London, where the British government continues to block proposed measures to fund a recovery, such as a Europe-wide tax on financial transactions.

These ideas are modelled on the austerity plans that were imposed on the countries of Latin America in the 1970s and '80s - and they are suicidal.

IMPOVERISHING SOCIAL SYSTEMS

Labour unions in the European Trade Union Confederation take the opposite view of these choices. Union leaders believe austerity is pushing Europe - and many industrialised countries outside the region - into a recession, unemployment and poverty. Democracy, both political and social, has to be restored.

To start with, it is time to rethink the EU, which has become nothing more than a large market, without any consideration of social or fiscal harmonisation. The result has been to set Europe's citizens in competition with each other, as can be seen in the debate about how Germany has grown at the expense of its partners.

Wealth that is generated by the creation of a continent-wide market should benefit the citizens of the EU together. It should, above all, raise standards of living. But the effect has been the opposite.

As governments compete to attract companies by offering lower corporate tax rates and social contributions, the result has been to impoverish social systems and public finances and, therefore, workers and pensioners.

MAKE EMPLOYMENT PRIORITY

Priority has to be given to growth and employment, rather than pleasing the markets. We need new economic, social and monetary policies. We need to move towards a new distribution of wealth that favours income derived from labour over capital, wages and productive investments over financial investments and dividends.

Far from reducing the purchasing power of workers and retirees by undermining the pension and social-welfare systems, we need to boost these as a way of supporting internal growth that is much less dependent on external markets.

We need proactive employment policies that promote public-works projects and laws that discourage companies from cutting staff levels when profits are high.

All this is especially important for the young. Unemployment for the under-25s is now 23 per cent in France, more than 30 per cent in Greece and 50 per cent in Spain.

The argument so often put forward to justify reductions in labour costs - keeping companies competitive - doesn't stand up to scrutiny. What handicaps European businesses today is the lack of quality and innovation. To try to compete with Chinese businesses by lowering labour costs is a decoy. It does nothing but benefit short-term corporate profits, to the detriment of employees.

More of the wealth that companies produce should be used to increase salaries (with social-security payments), and to pay for training as well as research and development. Doing so would help companies to innovate and strengthen their position in the market.

Above all, we need to maintain employment in the public services, the quality of which benefits companies as well as individuals. Cutting public spending can only be done to the detriment of the very things that underpin the growth of large industrialised economies: Excellence in education, an effective health system and quality public services.

HEAVIEST BURDEN ON LEAST PROTECTED

Social-protection systems based on solidarity between the generations, between men and women, rich and poor, have to endure in their current form. To attack them is to cast onto the mercy of the marketplace our ability to maintain our health, to safeguard our pensions and to raise our children in good conditions. Invariably, this produces two-speed protections and weakens the poorest.

Leaders on Europe's political right are refusing to question the economic model they have been supporting for decades. The financial crisis has shown that this model, based on deregulation, privatisation and reduction of the state's role, is exhausted, if not bankrupt.

Either by error or ideological stubbornness, Europe's current leaders are imposing the heaviest burden of reform on those who are least protected. If Europe's governments continue on this path, they risk tipping their countries into new crises and reinforcing the nationalism and xenophobia that's already becoming all too evident. BLOOMBERG

Paul Fourier is a member of the executive board of the Confederation Generale du Travail, one of France's largest labour-union groups.

Monday, April 23, 2012

Does America need an Arab Spring? That was the question on my mind when I called Dr Frank Fukuyama, Stanford professor and author of The End of History and the Last Man.

Dr Fukuyama has been working on a two-volume opus called The Origins of Political Order, and I could detect from his writings that his research was leading him to ask a very radical question about the United States' political order today, namely: Has America gone from a democracy to a "vetocracy" - from a system designed to prevent anyone in government from amassing too much power to a system in which no one can aggregate enough power to make important decisions at all?

"There is a crisis of authority, and we're not prepared to think about it in these terms," he said. "When Americans think about the problem of government, it is always about constraining the government and limiting its scope."

That dates back to our founding political culture. The rule of law, regular democratic rotations in power and human rights protections were put in place to create obstacles to overbearing, overly centralised government. "But we forget," Dr Fukuyama added, "that government was also created to act and make decisions."

That is being lost at the federal level.

A system with as many checks and balances built into it as ours assumes - and requires - a certain minimum level of cooperation on major issues between the two parties, despite ideological differences. Unfortunately, since the end of the Cold War, which was a hugely powerful force compelling compromise between the parties, several factors are combining to paralyse our whole system.

For starters, we've added more checks and balances to make decision-making even more difficult - such as senatorial holds now used to block any appointments by the executive branch, or the Senate filibuster rule, requiring a 60-vote majority to pass any major piece of legislation, rather than 51 votes.

Also, our political divisions have become more venomous than ever. As former Democratic Senator Russ Feingold once remarked, at the rate that polarisation is proceeding, partisans will soon be demanding that consumer products reflect their politics: "We're going to have Republican and Democrat toothpaste."

In addition, the Internet, the blogosphere and C-Span's coverage of the workings of the House and Senate have made every lawmaker more transparent - making back-room deals by lawmakers less possible and public posturing the 24/7 norm.

And, finally, the huge expansion of the federal government, and the increasing importance of money in politics, have hugely expanded the number of special-interest lobbies and their ability to influence and clog decision-making.

Indeed, the US increasingly looks like the society political scientist Mancur Olson wrote about in his 1982 classic The Rise and Decline of Nations. He warned that when a country amasses too many highly-focused special-interest lobbies - which have an inherent advantage over the broad majority, which is fixated on the well-being of the country as a whole - they can, like a multi-limbed octopus, choke the life out of a political system unless the majority truly mobilises against them.

To put it another way, says Dr Fukuyama, America's collection of minority special-interest groups is now bigger, more mobilised and richer than ever, while all the mechanisms to enforce the will of the majority are weaker than ever. The effect of this is either legislative paralysis or sub-optimal, Rube Goldberg-esque, patched-together compromises, often made in response to crises with no due diligence. That is our vetocracy.

The Financial Times columnist Ed Luce notes that if you believe the fantasy that America's economic success derives from having had a government that stayed out of the way, then gridlock and vetocracy are just fine with you.

But if you have a proper understanding of US history - so you know that the government played a vital role in generating growth by maintaining the rule of law, promulgating regulations that incentivise risk-taking and prevent recklessness, educating the work force, building infrastructure and funding scientific research - then a vetocracy becomes a very dangerous thing.

It undermines the secret of our success: A balanced public-private partnership.

"If we are to get out of our present paralysis, we need not only strong leadership but changes in institutional rules," argues Dr Fukuyama. These would include eliminating senatorial holds and the filibuster for routine legislation and having budgets drawn up by a much smaller super-committee of legislators - like those that handle military base closings - with "heavy technocratic input from a non-partisan agency like the Congressional Budget Office", insulated from interest-group pressures and put before Congress in a single, unamendable, up-or-down vote.

I know what you're thinking: "That will never happen." And do you know what I'm thinking? "Then we will never be a great a country again, no matter who is elected."

We cannot be great as long as we remain a vetocracy rather than a democracy. Our deformed political system - with a Congress that's become a forum for legalised bribery - is now truly holding us back. THE NEW YORK TIMES

It's disturbing that the public combs over every word from Breivik, who should be treated as a terrorist

Apr 23, 2012

by Jonathan Freedland

Does Abu Qatada play World of Warcraft? Did he once, like Anders Behring Breivik, dedicate a sabbatical year to a "hardcore" playing of the game?

We don't know. Perhaps we will find out when Abu Qatada, often described as the spiritual leader of Al Qaeda in Europe, finally faces trial. But I wouldn't bet on it. For when alleged jihadists like Abu Qatada have been brought to trial, they don't quite get the treatment accorded to Breivik this past week.

If they are allowed to testify for five solid days, given an extended opportunity to expound their world view, then the world's press do not hang on their every word, reporting in tweet-sized nuggets the nuances of their philosophy. Nor are their personal life histories, their psychology and video game habits, probed and debated.

Of course comparisons are tricky, not least because those who have staged the most lethal acts of jihadist violence - in New York, Madrid or London - have rarely lived to stand trial. But take this contrast.

In Oslo, the court has been listening to a man who planted a bomb that killed eight and who went on to murder another 69 people, mostly teenagers, on the island of Utoya - a death spree Breivik described on Friday in terms that stop the heart.

There has been copious discussion of Breivik's psyche and especially his views, starting with his courtroom lament that Norway had become "a dumping ground for the surplus births of the Third World".

VASTLY DIFFERENT COVERAGE

Contrast that with the airline bomb plot of 2006, in which an Al Qaeda cell in Britain planned to blow seven transatlantic jets out of the sky.

News reports of that trial offered a scant few lines about the conspirators' individual motives, with most of the coverage focused on operational details, the mechanics and scale, of the planned attack.

My colleague Vikram Dodd, who covered that London trial, was struck when he heard a BBC Radio 5 live phone-in this week that was regularly interrupted by snippets from Breivik's statement. "The grammar of the coverage was as if this was the Chancellor giving his budget," says Mr Dodd.

More than one caller to that programme, while quick to insist they disagreed with Breivik's methods, did rather think the Norwegian had a point about multiculturalism run riot. "I can understand where this guy's coming from," said Mr Tom from Dover, south-east England.

Several readers of a Guardian article sought to post comments in the same vein, calling for "a complete stop of immigration from Muslim countries" and suchlike.

To listen to it, you'd think Breivik had simply wanted to start a debate, that he'd perhaps written a provocative pamphlet rather than commit an act of murderous cruelty.

TRIAL AS A STAGE TO THE WORLD

It was to avoid precisely this problem that the United States Congress acted to relocate the prospective trial of Khalid Sheikh Mohammed, the alleged principal architect of the 9/11 attacks, from federal court in Manhattan to a military tribunal at Guantanamo.

They did not want him enjoying the platform so gleefully exploited by Breivik. Perhaps they understood what the latter wrote in his 1,801-page manifesto, posted before the Utoya killings: "Your trial offers you a stage to the world."

The comparison is not so far-fetched. Breivik has expressed his admiration for Al Qaeda's willingness to "embrace" death and was keen to adopt the organisation's methods: His ultimate goal last July was to behead Norway's former Prime Minister and post the video online.

Like Al Qaeda, he believes in acts of spectacular violence as a first step to changing the world, seeks to purge his own people of those deemed weak in the face of the enemy, yearns for a pure, past golden age that never existed and dreams of apocalypse. Above all, he wants those he regards as his people to be unsullied by contact with inferior others.

In this, Breivik and Al Qaeda are kindred spirits.

IS THERE A RIGHT WAY?

What, then, is the right way to bring such people to justice, whether Breivik or Khalid Sheikh Mohammed?

The cost of the Norwegian approach is that, by treating Breivik like any other defendant, the courts have given him that global megaphone. That represents a perverse reward for his actions: He would never have got such a hearing had he confined himself to ranting on a blog.

More alarmingly, the Oslo trial has surely supplied an incentive to any would-be Breiviks: Kill as he killed and you too will get the attention of the world.

And yet, by trying Mohammed behind closed doors, the US too has handed the forces of terror a kind of victory. They have declared there are limits to the open society, that the rule of law is not strong enough to cope with every eventuality. In a small way, they have conceded ground to the terrorists' view of the world.

How much more appealing is the message of the Norwegian PM last summer, who declared his country would respond to Breivik with "more democracy, more openness and greater political participation".

ONE OF THEM Versus ONE OF US

Whichever approach we take to such crimes, Oslo's or Washington's, one duty is surely clear: We have to be consistent. We cannot apply different standards to terrorists depending on whether they are fanatics of the white supremacist or jihadist variety.

And yet we do just that.

Mr Scott Atran, an eminent anthropologist who has briefed American officials on the nature of terrorism, explains that we adopt radically different approaches depending on whether we believe the threat is from within or without.

Outside attackers, like the 9/11 hijackers, are treated only in terms of the impact and consequences of their actions; those who come from "our side", as the Norwegians see Breivik, are examined for their intentions, what made them act the way they did.

Witness the case of Robert Bales, the US soldier who murdered 16 civilians in Afghanistan. "When it all comes out, it will be a combination of stress, alcohol and domestic issues - he just snapped," said the US military spokesman. It was personal, not political.

Had it been an Afghan soldier killing Americans, it would have been the other way around.

It's clear why we might do this. We can unite against an outside enemy; if the threat is from within, we want to believe it amounts to no more than a single, lone madman. "People don't want to probe," says Mr Atran. "They want to be reassured."

But this division, instinctive as it might be, is not really defensible. Terrorist murder is terrorist murder and we need to treat it that way - even when the killer looks like us. THE GUARDIAN

Tuesday, April 17, 2012

Japan is not the only Asian country in need of more openness about its own past

By Clarissa Oon

A SINGAPORE history teacher's role-playing of a sword-wielding Japanese soldier, reported by this newspaper late last month, has sparked off a debate that shows Japanese brutality in World War II still touches a nerve here.

The debate began in The Straits Times Forum Page, when cultural studies scholar Liew Kai Khiun criticised teacher Malcolm Tan's creative teaching methods as 'one dimensional', symptomatic of a lack of 'more balanced and broader perspectives about the Japanese Occupation' in the history syllabus.

But his letter in turn sparked others slamming segments of Japanese society for infamously glossing over the military's wartime atrocities. One writer, gynaecologist Wong Mun Tat, compared the other World War II aggressor Germany's open teaching of the Holocaust in schools and widespread recognition of guilt with Japan's relative reticence on its war crimes.

'We can forgive, but not forget' was a line that came up repeatedly in these letters. They referred to harrowing crimes, such as the mass killing and rape of over 100,000 Chinese citizens in the 1937 Nanjing massacre, and closer to home, the Sook Ching massacre of thousands of Singapore Chinese during the Occupation.

And yet the 'good Germany, bad Japan' dichotomy also runs the risk of over-simplification, as irresistible as it seems, given German society's relentless parsing of guilt and responsibility for the killing of six million Jews in numerous museums, films and books - notably Bernhard Schlink's bestselling novel Der Vorleser that became a powerful Oscar-winning Hollywood film, The Reader (2008) - and the fact that Japanese society remains divided in its interpretations of the wartime past.

Confronting moral evil as a collective society is a complex process that is not merely psychological or ethical in nature. As researchers such as Washington University international studies professor Daniel Chirot and political journalist Ian Buruma have shown, geopolitics also has something to do with it.

Germany and Japan faced very different post-war geopolitical realities that influenced how far each country went beyond trying and punishing war criminals and making financial reparations. Geopolitical considerations are also reflected in the timing of official apologies for the atrocities.

West Germany, through its first chancellor Konrad Adenauer, accepted full responsibility for Nazi-era war crimes a few years after the war ended. Japan, however, acknowledged the wartime suffering it had caused South Korea and China only when formal diplomatic ties were established, respectively, in 1965 and 1972. Official recognition that the war was 'aggressive' on Japan's part and full apologies for its wartime conduct in Asia came only in the 1990s.

Basically, West Germany had pragmatic reasons to confront its wartime brutality in order to make nice with its neighbours, whereas Japan faced no such imperatives and could afford to remain in denial for much longer.

The threat of communist East Germany and Eastern Europe, as well as the need to ally itself with the Western European nations it had invaded during the war, forced an impoverished West Germany to ensure that it would never lapse back into its jingoistic ways, right down to educating its young differently.

Japan, however, had no such pressures in its own backyard. The United States, which occupied Japan briefly after the war and gave it liberal democracy as well as its current pacifist Constitution, allowed Emperor Hirohito - the architect of the Japanese war effort - to keep his position. The US needed Japan's help to fight the Korean War in the early 1950s, and so did not force the examination of wartime guilt in the wider Japanese society.

With China, the two Koreas and South-east Asia all distracted by domestic turmoil until the late 1970s, Japan had to account to its neighbours for its wartime atrocities only when the region became more economically interdependent.

As a result, there have always been right-wing Japanese politicians and intellectuals who have ignored the horrors committed by the military in Asia and even insisted that these invading armies were welcomed as liberators.

History textbooks which whitewash wartime abuses are currently used in less than 2 per cent of Japanese schools. Other textbooks do not hide but also do not stimulate debate and analysis of these disturbing events. This was found by Stanford University's Shorenstein Asia-Pacific Research Centre in an ongoing comparative study of history textbooks used in East Asian countries.

Critically, however, the study found that the history texts of China, South Korea and Taiwan were also far from objective and coloured by 'the politics of nationalism', as project director Shin Gi Wook told this newspaper in 2009.

The crux of the issue is this: While Japan's neighbours should continue to nudge it to face up more fully to its wartime abuses, these countries should also move towards more honest and open examination of their own histories.

The most egregious example is China, which has excised from history textbooks and public discourse all mention of the mass famine during the Great Leap Forward (1958-1960), the violent political campaign that was the Cultural Revolution (1966-1976) and suppression of pro-democracy protests at and near Tiananmen Square on June 4, 1989.

What also helps push Asian societies to come to terms with past abuses are years of campaigning by a critical mass of public intellectuals of good conscience.

Asia needs more heroes such as Yuan Tengfei and Saburo Ienaga. Yuan is a Chinese history teacher whose popular online videos discuss the Great Leap Forward famine that killed millions and criticises its architect Mao Zedong, braving house arrest for doing so. Ienaga is a Japanese history professor who fought three decades of legal battles against the whitewashing of the country's war crimes in history textbooks, paving the way for more objective Japanese textbooks.

Singaporeans should also cast a self-critical eye on biases and omissions in the telling of our own national history, even as we take a hard look at the narratives of other countries.

Saturday, April 14, 2012

OPTIMISTIC slogans such as 'the change is me' and 'vote for change' have been used in successful campaigns.

The first was the slogan for this year's National University of Singapore (NUS) admissions campaign, while the second was used in United States President Barack Obama's presidential campaign in 2008.

Whether the change effected turns out to be for better or worse depends on our intentions, as well as the contexts and the needs of the people affected by the change. One cannot assume that good intentions will translate to positive differences.

This year, one of NUS' University Scholars Programme (USP) modules will examine state-minority relations in mainland South-east Asia. The inter-disciplinary course includes a three-week field trip, where students will undertake field research on highland minority groups in Mae Hong Son, Thailand, and Luang Namtha in Laos.

This is the product of a summer trip that both of us, together with four other students and our professor Dr Peter Vail, embarked on last year.

Dr Vail actively involved us in the planning of the course and immersed us in real-world field situations. Conventional stereotypes of highland and minority peoples were dispelled through our first-hand interaction with them during our homestays at several villages.

The experiences of bathing in the river, eating bamboo shoots for weeks and interacting with Thai and Laotian government officials were all equally memorable.

It was during this trip that our idea of 'change' was redefined, and we hope to share it with prospective students looking for their desired education paths and what they expect out of them.

We often push for change in a unilateral, hopeful manner, unaware that such change can fall short of real impact.

For instance, in one of the villages we visited, we encountered a stairway apparently leading to nowhere. The villagers later told us that it was built by external companies who wanted to boost tourist revenues by creating a pathway to a waterfall.

Little did the external parties know that the waterfall was only seasonal.

Our trip was replete with such examples of one-sided hope for change.

Nevertheless, when the recipients of change were themselves involved, efficacy improved, people were more engaged and real change happened.

For example, the problem of restricted access to health care does not always have to be addressed by using medical aid from non-government organisations. It may be better addressed by awarding villagers their citizenship rights to free basic health care, or by building a proper road to connect villages to the nearest town hospital.

Having an academic module with a field trip component allowed us to learn about policy issues and social trends on the macro level, as well as the micro-level effects that these policies have on people. Some micro-level problems can be more easily solved with policies on the macro scale, and these policies should also be made with the people affected by them in mind.

Real change happens when we break out of our mental moulds and see that problems may not always take on the form we expect them to. In our case, not all rural people were cut off from communications. Education can be provided by installing televisions - for example, some Laotian children learn Thai from TV shows. Also, not all villagers prefer washing in bathrooms to bathing in the natural flowing water of rivers.

It was only when we took problems on their own terms and appreciated them in their real contexts that our trip culminated in something fruitful for our juniors and future entrants of this course.

The change is you - but only if you break out of your initial mindsets and stereotypes to face reality head-on with an open mind.Priscilla Goy, 23, is a final-year economics student and Tan Wei Lie, 22, is a second-year sociology student at the National University of Singapore. Both are active in the University Scholars Programme.

Labour chief warns that higher salaries without productivity gains could lead to job losses

By Lydia Lim

THE unionists who cheered an economist's proposal to raise wages at the bottom by 50 per cent over three years may not be aware of its potential costs, labour chief Lim Swee Say said yesterday.

On Tuesday, a union leader told The Straits Times that Professor Lim Chong Yah's plan to hike wages at the bottom and freeze those at the top was 'a real morale booster' and 'long overdue'.

Yesterday, Mr Lim, NTUC's secretary-general, cited this comment twice during an hour-long press conference. He said it was understandable that union leaders would support a plan to raise workers' wages if they believed it would be cost-free.

'If you can up the wages of workers by 50 per cent with zero downside, I think union leaders, of course, will welcome it. But I also think that there are many union leaders who understand that nothing comes free so there must be some downside,' Mr Lim said.

The labour chief himself was sceptical that wages could be raised in the manner proposed by Prof Lim without workers and consumers paying a price.

On Monday, Prof Lim outlined a radical plan to close Singapore's growing income gap by raising wages of workers who earn $1,500 or less by 50 per cent over three years, and freezing wages of those who earn $15,000 or more for the same period.

Yesterday, NTUC's Mr Lim said: 'This approach is very risky. What is at stake are jobs and structural unemployment. You can push up the wages of low-wage workers by 50 per cent in three years, but you cannot improve his skill, his productivity, his employability by 50 per cent in three years.'

After criticisms from other economists, Prof Lim mounted a defence of his proposal in an interview on Wednesday with The Straits Times.

Responding to worries that the plan would drive away foreign talent and raise unemployment, he said Singapore would remain attractive to talent, and that Singaporeans who lost their jobs could be retrained and re-employed, given the tight labour market.

He conceded his plan might raise prices but said it would be all right as long as Singapore kept its rate of inflation at about half the rate of the world's inflation.

Yesterday, the NTUC chief dwelt at length on why he doubted that Prof Lim's 'thought-provoking' proposal would be as cost-free as claimed.

The first Cabinet minister to comment on the wage shake-up plan, Mr Lim warned that if productivity gains did not match the 50 per cent hike in wages, workers would pay a price in the form of job losses and structural unemployment.

He also gave a rough estimate of the size of the wage bill that would result from Prof Lim's proposed wage hike for low-wage workers - $4.56 billion. To arrive at that figure, he assumed a base wage of $1,000 and a pool of 400,000 low-wage beneficiaries.

He warned that someone would have to foot the bill. If the low-wage workers were from domestic sectors such as cleaning, the hike would mean a higher cost of living for Singaporeans, in the form of higher service and conservancy charges, for example, he said.

If the workers were in the export sectors, their companies would have to bear higher costs, and if they should become less competitive as a result, the outcome would be job losses, he added.

At the press conference, Mr Lim stressed he was merely stating his position as labour chief, not issuing a rebuttal to Prof Lim or stating the Government's position.

Prof Lim, who was chairman of the National Wages Council from 1972 to 2001, also argued that Singapore's high-wage policy of 1979 was effective in driving up productivity.

Asked about that yesterday, the NTUC chief said there was no consensus that the policy was a success.

His own recollection was that Singapore came to the conclusion that the policy, which led to wages outstripping productivity, resulted in the 1985 recession.

That was why Singapore abandoned it in favour of a policy centred on productivity and innovation, which remains in place today, said Mr Lim.

He also said that in today's globalised world, jobs and manpower are far more mobile than they were 30 years ago. 'In the early days, I can make a mistake but if the world is less mobile, I can still get away with my mistake. But in a highly globalised world, a slight mistake can lead to serious repercussions.'

lydia@sph.com.sg

[This is a variant of the minimum wages proposal, except instead of a wage line, the proposal is an across the board increase without any justification. But like the minimum wage proposal, there is an attractiveness to this proposal. If we ignore the possible costs and knock-on effects.]

Friday, April 13, 2012

THE Health Sciences Authority's (HSA) latest move to get doctors to register all medical devices from January this year has upset the medical community.

The HSA says its move is to ensure patient safety. But doctors ask if the registration replicates approvals that regulators like the United States Food and Drug Administration (FDA) have given.

The HSA requires an 'abridged' evaluation for devices already approved by a reputable foreign authority like the FDA or its European equivalent. But doctors say it takes too long, costs too much and requires too much paperwork to get medical devices cleared for use.

The regulator charges $25 to clear a low-risk device while medium- and high-risk ones incur fees ranging from $2,300 to $11,900.

Because many inexpensive devices are not used in enough numbers to merit the fees, doctors may find it no longer worthwhile to import them. The process also requires detailed input from the manufacturer, which may not bother with Singapore's tiny market.

The medical profession is right to demand a better and economically viable system that ensures patient safety. The HSA is actively engaging doctors to work out solutions.

There is one aspect of this issue, though, on which the HSA is on strong grounds: its insistence that having an American FDA stamp of approval does not automatically mean a particular device is safe to use.

In the last decade, the FDA's shortcomings were exposed by a series of safety issues. Last year, the FDA's processes were scrutinised by the Institute of Medicine, medical advisers to the US government, but the FDA has yet to implement changes.

The devil is in the details.

Currently, the FDA requires low-risk devices such as surgical gloves to simply adhere to labelling rules and good manufacturing practices.

By contrast, high-risk devices such as heart valves or stents must be approved before use through a process that is akin to that for new drugs. The FDA demands lots of good clinical data from extensive clinical trials using the new device in humans. Such trials usually entail follow-up of human subjects for at least two years.

Non-risky items do not pose a problem to patient safety. Nor are very risky devices a big concern. This is because in 2009, for example, only 20 such devices were submitted to the FDA for approval.

As the FDA does not have enough specialist reviewers for every possible device, it calls up relevant experts from academe and industry to form an advisory committee for each risky device. So the process for risky devices is thorough, although time-consuming and very costly.

It is medium-risk devices that are a potential safety concern. In 2009, some 3,600 medium-risk devices such as infusion pumps were submitted to the FDA for approval. Such devices are approved by its internal reviewers, a workforce that has shrunk in size because of budgetary constraints. And it is the way that medium-risk devices are approved through the 510(k) process that is cause for serious concern.

In 510(k), the device maker just has to show that its new device is 'substantially equivalent' to one that has been on the market for about the same use. (The latter is called the 'predicate'.)

If FDA reviewers decide that the new device is substantially equivalent to an existing one, they approve it without calling for an advisory committee. If not, the device is reclassified as a risky one, for which an advisory committee comprising outside experts is then formed.

Last year's study found that the 510(k) process allows manufacturers to cite inappropriate predicates. Some may be outdated and no longer in clinical use. Some are downright unsafe and have been recalled from the market, but don't show up in FDA data systems as having been recalled. Some got their past approvals based on past predicates. The chain can go back for decades.

The review concluded that the 510(k) process does not establish device safety and effectiveness. It also found the FDA's collection and analysis of data concerning device safety in actual patient use to be sorely lacking.

Given these shortcomings, local doctors should not assume that all FDA-approved devices must be safe to use. Doctors should use them advisedly.

At the same time, given Singapore's limited resources, the HSA should also not simply replicate the FDA's work in approving devices pre-market, so as not to reinvent the wheel for a tiny market.

Singapore, to be sure, is not alone in facing this issue. Different countries adopt different standards for regulating medical devices.

One approach is to give doctors wider latitude in importing devices, but monitor their use and safety issues. For example, the HSA can mandate the reporting of adverse events by doctors and promote their reporting by patients for devices.

In clinical matters, patients and their doctors may be in a better position than regulators to decide whether a certain device should be used in any particular case. Even as the regulators and doctors continue to find ways to resolve this issue, one common concern must bind them: a commitment to patient welfare. This means giving patients access to medical devices for health care that is affordable while ensuring their safety.

EVEN if everyone in a society agrees with the old adage - an apple a day keeps the doctor away - is it still acceptable for a government to make a daily intake of the fruit mandatory for citizens?

That is the somewhat philosophical question Republicans in the United States are asking about the 2010 Patient Protection and Affordable Care Act, better known as 'Obamacare', whose constitutional validity was recently the subject of oral arguments before the United States Supreme Court.

If health insurance is like apples - or broccoli, as one of the judges likened it to during hearings - in other words, a commodity bought and sold in the marketplace, how can President Barack Obama frustrate free choice and force millions of uninsured Americans to either buy coverage or pay a penalty to the government?

It's an outrage, say the Republicans, a travesty of the idea of limited government. Democrats have a ready counter: Insurance is different from other goods because while it is possible for someone to not be in the market for broccoli, everyone is willy- nilly a buyer of health-care services.

A citizen who does not have insurance will still fall sick, and may still show up in the emergency room of a hospital. That's the point where the society - especially a prosperous one like the US - will find it hard to look the other way. Since 1986, it has been illegal in the US for hospitals to refuse to care for, or send elsewhere, patients who need critical intervention but cannot afford it.

But there is no free lunch. The cost of this additional burden on the health-care system from free riders is borne by paying insurance customers. Their premiums are higher than they would otherwise be. All that Obamacare seeks to do is to redistribute the costs.

Illegal immigrants and those who earn so little that health-care premiums will account for 8 per cent or more of household incomes will be exempt. Medicaid will expand to cover the indigent elderly (and US states resent the extra financial burden that this expansion will impose on them). But out of 50 million uninsured Americans, some 16 million will either have to sign up with insurance companies or pay penalties for not doing so.

The conservatives hate the penalties. But they are there for a reason. The advantage Obamacare offers to consumers is that it takes away the power of insurance companies to deny coverage on any pretext, including that most obnoxious one: pre-existing conditions.

To view Obamacare as an encroachment of government in private lives is silly, Democrats say, because the only way insurers can be forced to cover everyone at a fair price is by requiring individuals to get cover.

So who's right? Judging by the kind of questions the justices asked, odds that Obamacare - or at least its compulsory individual mandate - will be thrown into the garbage dump have risen in markets where traders place bets on uncertain future events.

A defeat for Obamacare will close the doors on a compromise between Republicans and Democrats and leave the US with two stark choices, one in which millions of Americans remain uninsured and vulnerable, as they are now, and the other in which everyone gets health-care services paid for by taxes.

Democrats will bristle about the injustice of the former and Republicans will not support the latter. What is so different, Republicans will ask, between Mr Obama requiring all individuals to eat an apple a day and the government taxing everyone, buying apples with the money raised and then giving away the fruit 'free' to all citizens?

The debate has no easy answers, but as for Obamacare being an intrusion into free choice, surely there is something inherently 'un-free' about a parent having to worry about the financial consequences of children falling sick?

There is also something deeply immoral about the tyranny of insurance companies that all of us - anywhere in the world - must suffer. Denying coverage to someone who has high cholesterol but no other manifest health issues? That's awful. And it gets worse when every insurer follows the 'industry best practice' and leaves people uninsured.

This kind of discrimination may make insurance companies worthy of their shareholders' admiration. But if the whole point of insurance is to avoid payouts, then people may as well demand that their government move towards a Canadian-type, mostly tax-funded health-care system. Today, it is seen as un-American. Maybe that view will change; maybe it won't.

To the extent that health is a subject in which every society has a keen interest, the world will pay attention to the US Supreme Court, which is expected to announce its decision in June.

Tuesday, April 10, 2012

"[I]ndustry consolidations have created gigantic bureaucracies. Hierarchical organizations have a very different logic than smaller firms. In less consolidated industries, success and failure are largely the result of the decisions you make, so intelligence about the reality of the marketplace is critical. Life is different in gigantic organizations, where success and failure are almost impossible to attribute to individual decisions. Though a given conglomerate might have hundreds or thousands of "executives," each is much more beholden to a complex culture of bosses. Even if people mean well, they're living and dying by a system where the incentives are to seek advancement by pushing responsibility downward and pulling credit upwards. In large, slow-moving bureaucracies, conventional thinking and risk avoidance become paramount, irrespective of how many times a day people at that organization use the word "strategy" or "innovation." It is far more preferable to fail conventionally than to make a daring but uncertain decision without the full backing of the entire organization. Because massive bureaucracies are so much more common than they were even a few years ago, decisions are simply not in vogue right now."

"... most importantly, the world's economy is today driven more by policy makers than at any time in recent history. At the behest of government officials, banks have been shielded from the consequences of their market decisions, and in many cases exempt from prosecution for their potential law-breaking. Nation-state policy-makers pick the winners in industries, such as automotive, and guarantee the smooth operations of others, such as Verizon and General Electric, both of which received zero-interest cash flow via the TARP program in 2008 and 2009. Eventually, states might do less of directing specific outcomes in the world markets, but for now, these policy-makers have suspended many critical free market principles, and at times the rule of law, on the notion that we are in a crisis, and keeping the system together comes first.

Thus, what use is the old model of competitive analysis if you are looking at markets in Greece right now? Which would have more impact on a given market: the clever, innovative actions of a CEO in Athens, or the politics within the European Central Bank? And how about analyzing the future of the housing market in the United States? Are you going to examine how much people are able to pay for accommodations and the level of housing stocks available in given cities, or shall you look at the desires of central bankers and Congressional policy-makers able to start new financing programs to end up with a desired outcome? How can you use classical competitive analysis to examine the future of markets when the relationships between firms and government agencies are so incestuous and the choices of consumers so severely limited by industrial consolidation?

There is no good way to reliably predict the future in these markets anymore, except maybe by being privy to the desires of an ever-decreasing number of centrally connected power players. Companies still need guidance, but if rational analysis is nearly impossible, is it any wonder that executives are asking for less of it? What they are asking for is something, well, less productive. "In other words, there is more govt intervention in the markets now than at any other time. A centrally planned economy like the former Soviet Union? If not centrally planned, then centrally intervened, disrupted, distorted.

Wednesday, April 4, 2012

Economists, political scientists and sociologists have long suffered from an academic inferiority complex: physics envy. They often feel that their disciplines should be on a par with the 'real' sciences and self-consciously model their work on them, using language ('theory', 'experiment', 'law') evocative of physics and chemistry.

This might seem like a worthy aspiration. Many social scientists contend that science has a method, and if you want to be scientific, you should adopt it.

The method requires you to devise a theoretical model, deduce a testable hypothesis from the model and then test the hypothesis against the world. If the hypothesis is confirmed, the theoretical model holds; if the hypothesis is not confirmed, the theoretical model does not hold. If your discipline does not operate by this method - known as hypothetico-deductivism - then in the minds of many, it is not scientific.

Such reasoning dominates the social sciences today. Over the past decade, the National Science Foundation has spent many millions of dollars supporting an initiative called Empirical Implications of Theoretical Models, which espouses the importance of hypothetico- deductivism in political science research. For a time, The American Journal of Political Science explicitly refused to review theoretical models that were not tested. In some of our own published work, we have invoked the language of model testing, yielding to the pressure of this way of thinking.

But we believe that this way of thinking is badly mistaken and detrimental to social research. For the sake of everyone who stands to gain from a better knowledge of politics, economics and society, the social sciences need to overcome their inferiority complex, reject hypothetico-deductivism and embrace the fact that they are mature disciplines with no need to emulate other sciences.

The ideal of hypothetico-deductivism is flawed for many reasons. For one thing, it is not even a good description of how the 'hard' sciences work. It is a high school textbook version of science, with everything messy and chaotic about scientific inquiry safely ignored.

A more important criticism is that theoretical models can be of great value even if they are never supported by empirical testing. In the 1950s, for instance, economist Anthony Downs offered an elegant explanation for why rival political parties might adopt identical platforms during an election campaign. His model relied on the same strategic logic that explains why two competing petrol stations or fast-food restaurants locate across the street from each other - if you do not move to a central location but your opponent does, your opponent will nab those voters (customers). The best move is for competitors to mimic each other.

This framework has proven useful to generations of political scientists even though Downs did not empirically test it and despite the fact that its main prediction, that candidates will take identical positions in elections, is clearly false. The model offered insight into why candidates move towards the centre in competitive elections, and it proved easily adaptable to studying other aspects of candidate strategies. But Downs would have had a hard time publishing this model today.

Or consider the famous 'impossibility theorem', developed by the economist Kenneth Arrow, which shows that no single voting system can simultaneously satisfy several important principles of fairness. There is no need to test this model with data - in fact, there is no way to test it - and yet the result offers policymakers a powerful lesson: There are unavoidable trade-offs in the design of voting systems.

To borrow a metaphor from philosopher of science Ronald Giere, theories are like maps: The test of a map lies not in arbitrarily checking random points but in whether people find it useful to get somewhere.

Likewise, the analysis of empirical data can be valuable even in the absence of a grand theoretical model. Did the welfare reform championed by former United States president Bill Clinton in the 1990s reduce poverty? Are teenage employees adversely affected by increases in the minimum wage? Do voter identification laws disproportionately reduce turnout among the poor and minorities? Answering such questions about the effects of public policies does not require sweeping theoretical claims, just careful attention to the data.

Unfortunately, the belief that every theory must have its empirical support (and vice versa) now constrains the kinds of social science projects that are undertaken, alters the trajectory of academic careers and drives graduate training. Rather than attempt to imitate the hard sciences, social scientists would be better off doing what they do best: thinking deeply about what prompts human beings to behave the way they do.

Kevin A. Clarke and David M. Primo, associate professors of political science at the University of Rochester, are the authors of A Model Discipline: Political Science And The Logic Of Representations.

THE US 'pivot' towards Asia in foreign and defence policy has rattled the region. China perceives the US move as an attempt to constrain its 'rise'. As if confirming Beijing's worst fears, Admiral Jonathan Greenert, Chief of US Naval Operations, said that China's rising capability could limit US access to the South China Sea and that Washington will continue its efforts to ensure 'freedom of navigation' there.

While Vietnam and the Philippines welcome the policy shift, other Asean nations are less sanguine. Indeed, some are outright worried that US-China rivalry will dominate regional political affairs and increase instability. Even Singapore, an American 'strategic partner', cautioned the United States against using extreme anti-China rhetoric in domestic political debate in this election year.

But US-China competition for the 'hearts and minds' of South-east Asian countries has already begun to undermine Asean's attempts to maintain control of regional security management. Regarding the vexed South China Sea disputes, the US has essentially sided with the Asean claimants (its ally the Philippines, and Brunei, Malaysia and Vietnam).

Ironically, US backing may make it more difficult for Asean and China to agree on a code of conduct because some claimants may be more assertive and even take riskier actions than they otherwise would. Some even suggest that this works to the US advantage by pushing some Asean members towards the US.

The US has quickly begun to implement the pivot. It entered talks with the Philippines to expand its military presence there including deploying surveillance aircraft to increase 'maritime domain awareness' in the region.

It is also discussing with Thailand the deployment of American warships in the country. This is in addition to deploying new littoral combat ships to Singapore (which has constructed a naval base designed to berth American aircraft carriers), and 'rotating' up to 2,500 American troops to Darwin along with assets to be used in the event of a military contingency in Asia.

As Mr Hugh White, formerly Australia's chief strategic planner in the Defence Department, put it: '... since (then-US President Richard) Nixon went to China, Australia has not seen the alliance as a military alignment against China. Now we do. That is the big significance of what the Gillard government has done.'

In an extraordinary opinion piece in the Japan Times, Australia's former conservative prime minister, Mr Malcolm Fraser, criticised the US military deployment to Darwin as 'pointless', without reason, and unnecessarily dividing Australian public opinion.

To top it off, it was leaked that the expanded US military presence in Australia is eventually likely to include stationing of the newest version of US Global Hawk surveillance planes in the Cocos Islands and perhaps even on Christmas Island only 354km south of Jakarta, Indonesia. The drones would likely surveil the South China Sea and the Malacca Strait.

If China had any doubt about where Australia stood in the US 'scheme of things', it doesn't now. Indonesia's response to the news was to file a diplomatic protest with Australia and the US, complaining that the surveillance flights would violate its sovereignty.

Ratcheting up the pressure, the US has told Asean that it must come up with a common and clear position on a code vis-a-vis China. Some pressure may be helpful - but too much pressure could crack and even split Asean on this issue. As Mr Simon Tay, chairman of Singapore's Institute of International Affairs, suggested, 'the tenor and intention of that engagement (America with Asean on the South China Sea issues) can be a concern'.

By allowing the US to base troops in Darwin, Australia may well have helped 'strain' a regional grouping whose increased unity is in its clear long-term interests.

Apparently at China's bidding, Cambodia, as current chair of Asean, removed the South China Sea from the agenda for this week's Asean summit - much to the frustration of the Philippines and Vietnam which have borne the brunt of China's assertiveness on the issue. 'Cambodia does not want to use Asean to square up against another country,' explained government spokesperson Khieu Kanharith.

Although Asean has become adept at hedging and balancing, its unity, diplomatic skills and style are certainly being tested by the US pivot.

Indeed, Asean's method of decision- making based on consensus, consultation, and proceeding in a step-by-step manner may not be appropriate for dealing with this big power rivalry.

And as China's military might grows and the US steps up its involvement in the region, the window of opportunity for peaceful settlement of the South China Sea disputes is closing.

The writer is with the Seattle-based National Bureau of Asian Research.

Tuesday, April 3, 2012

THERE has been much recent discussion on whether free market capitalism is being dominated by more authoritarian versions. A few weeks ago, The Economist led with an article on 'The Rise Of State Capitalism' and it was a key topic of conversation at Davos. This debate is motivated by the significant economic and social challenges being faced by many advanced economies.

My view is that although meaningful changes are required to the models of capitalism employed in many advanced economies, this involves an adaptation of market-based capitalism to respond to new global realities rather than a shift to a fundamentally different model like state capitalism. Specifically, the dynamics unleashed by globalisation over the past 20 years mean an increasingly important role of government is positioning economies to compete.

There are two related aspects to this.

First, countries are competing to provide an attractive environment for people, capital and companies that are increasingly mobile across borders.

The second element is acting to develop a competitive domestic environment that supports locally based firms to succeed in global markets. Firms are the engines of growth, but the quality of the business environment is a key success factor for them.

Although this model of competition is private sector-led, it suggests a deliberate role for governments in positioning their countries to compete in the global environment. Countries need to be distinctive in some way to compete successfully for mobile factors against other locations, and to provide an environment that enables firms to compete successfully.

Countries can choose to compete in different ways. Some develop competitive strength around sector 'verticals', such as the life sciences or financial services, while others focus on 'horizontal' capacities such as tax rates, infrastructure quality, or the nature of the innovation ecosystem. There is no single policy template for success - Singapore and Denmark, for example, operate very different models. There are successful countries that have high and low tax rates, high and low levels of research and development spending, heavy and light labour market regulation, and so on.

But the policy settings do need to be coherent and to respond to global realities. If countries want to maintain high levels of government spending, for example, the economy needs to be sufficiently productive to support it. And these choices will change through time; the countries that succeed are those that adapt when the competitive landscape or their domestic situation changes.

Increasingly, the choice of how to compete is shaped by broader objectives. For example, many countries are looking to compete in ways that generate inclusive growth. These considerations may influence choices about which sectors or capacities to invest behind (for example, those with particular employment or wage profiles) or the design of tax and transfer policy.

The importance of a deliberate competitive strategy is increasing as countries face a global context that is more intensely competitive and volatile. Advanced economies need to determine the basis on which they want to compete in the global economy. In this model, governments assume a more deliberate role focused on shaping the environment for private companies to compete successfully.

Although some advanced-economy governments have significant portfolios of financial and commercial assets - such as Norway and Singapore - this is not a model of state capitalism in which governments rely on the direct control of companies to pursue their national interests. State capitalism has worked well for some countries developing rapidly, but becomes less helpful as countries develop and the private sector becomes a more important driver of growth.

For advanced economies, the choice is not between state capitalism and a hands-off free market version of capitalism. Rather, governments will seek to engage deliberately with the dynamics of globalisation.

To do this, governments need a coherent economic strategy, to manage risks and build resilience, and to construct a portfolio of external relationships, to navigate a more competitive, volatile order.

It was common a decade ago to talk of the 'market state', in which countries had to compete in open, globalised markets using a slimmed-down role reminiscent of Mr Tom Friedman's 'golden straitjacket'. But this focus on efficiency seems inadequate to the complexities of the emerging global environment.

Perhaps a better way of thinking about the role of government is the 'corporate state'; a more vertically integrated approach in which governments deliberately position their countries in the emerging global environment - much as a corporation would think deliberately about its competitive strategy, its risk exposures and its external relationships.

This conception is more the Singapore Consensus, involving a successful blend of state and market, than the Beijing Consensus. But even so, in an increasingly challenging global landscape, and in the context of an increasingly sophisticated Singapore economy with changing needs and preferences, changes to Singapore's competitive positioning - and the nature of its growth model - are more likely than not. Countries, like corporations, need to adapt.

The writer is director at Landfall Strategy Group, a Singapore-based government advisory firm.

The benefits of state capitalism

IN RECENT years, economists have come up with a theory known as 'post-autistic economics'.

Such a theory came about after lecturers and students at the Ecole Normale Superieure, France's premier institution of higher learning, sent out an online petition in 2000 claiming that the study of economics had become a somewhat 'autistic' subject, with students engaging in frivolous and abstract exercises (especially numerical ones), without any connection to events in the real world.

They proposed that the teaching of economics overcome its 'autistic' nature, to restore its range and depth as a social science and revive its links with the real world. The petition generated a lot of response in academic circles, with undergraduates at Britain's Cambridge University and America's Harvard University putting forward similar proposals.

Many were asking: What has gone wrong with the overall economic theory in the contemporary study of economics?

One hot topic in 'post-autistic economics' is the debate between 'liberal capitalism' and 'state capitalism'.

From the 1900s to the 1970s, people around the world believed the state (that is, the government) can play a crucial role in development and in resolving social conflicts. From the 1970s to the 2000s, led by Britain and the United States, the role of the state became tarnished, and the role of companies and the market was extolled.

As a result, the state's role in exercising control, supervision and management took a back seat. Liberal capitalism evolved into a sort of 'casino capitalism' with greed at its core, culminating in the US sub-prime mortgage crisis and the worldwide 'financial tsunami' of 2008.

Yet, over the past two decades or so, another form of capitalism - one with the government at the centre and known as state capitalism - has also been rising to the forefront. This form of capitalism did well in the countries where it is practised - including China, India, Russia, Brazil, South Africa, Saudi Arabia and the United Arab Emirates.

In China, state capitalism helped the country achieve an average growth rate of 9.5 per cent and an average increase of 18 per cent in foreign trade over the past 30 years.

Over the past decade, China's gross domestic product also grew three times to hit a total of US$11 trillion (S$13.7 trillion).

State capitalism as practised in China has provided a new model of capitalism for countries to choose from.

And China itself is the reason many newly emerging economies have also adopted state capitalism, and why the World Economic Forum made state capitalism a highlight of this year's forum.

Indeed, many Western business leaders have acknowledged that free-market capitalism in itself is not ideal and that state capitalism does have a value of its own.

Scholars know that all governments possess immense authority and have the capability to mobilise funds and manpower. This is especially so in emerging economies, where private capitalism is undeveloped, and the state plays an important role in mobilising funds and manpower.

For example, the decision of the government of former Russian president Boris Yeltsin to make privatisation its goal ultimately led to an outflow of national interests and rights, and resulted in rampant tax evasion and corruption.

As the country lacked the resources to look after its people, the average lifespan of the Russian citizen fell by as many as five years during that period.

After experiencing the negative effects of liberal capitalism, Russia then decided to embrace state capitalism, and the situation in the country improved greatly.

State capitalism offers governments much leeway. Countries can speedily mobilise funds and manpower, and set up and operate companies in a capitalistic fashion, building an autonomous foundation for the nation's rapid development.

Some companies operating under state capitalism can mobilise manpower and venture into sectors that private companies are unable to. They can venture into international resource markets and tender for projects worldwide through mergers and acquisitions, and bring in new technologies and management models. Once state-run enterprises go in this direction, they will become the driving force for the country's development.

In 2010, China's state-owned Huawei Technologies obtained the most number of patents worldwide. In recent years, the state-owned Temasek Holdings also played a core leading role in Singapore's rapid transformation.

Hence, many newly emerging economies around the world are embracing state capitalism, whereas liberal capitalism in the West is declining day by day.

Westerners such as Mr David Rubenstein, managing director of US private equity fund Carlyle Group, have warned that the West needs 'to improve the economic model that we have, and if we don't do that soon... the game will be over for the type of capitalism that many of us have lived through and thought was the best type of capitalism'.

Political risk consultancy Eurasia Group president Ian Bremmer's latest book, The End Of The Free Market: Who Wins The War Between States And Corporations, argues that state capitalism is doomed to fail as it lacks efficiency and is unable to carry out any innovation.

But his views do not hold water. The US government took action to rescue the aerospace company Lockheed Corp in the 1970s, and has never ceased to use state funds to revive poorly managed and inefficient companies, all in the name of bailing them out. What the US government has done and is still doing is actually a form of state capitalism that is even more extreme than the state capitalism practised elsewhere.

However, all newly emerging economies should remain ever vigilant. Only through appropriate and fair wages, efficiency and keeping technologies up to date can one prevent state capitalism from slipping into decline.

Did not Western capitalism end up in its current dire situation today because of greed and corruption?
This is an edited version of an editorial from the Feb 12 issue of the Chinese-language weekly Yazhou Zhoukan. Translated by Terence Tan of The Straits Times Foreign Desk.

March 13, 2012

Capitalism, Version 2012

David Rothkopf, the chief executive and editor-at-large of Foreign Policy magazine, has a smart new book out, entitled “Power, Inc.,” about the epic rivalry between big business and government that captures, in many ways, what the 2012 election should be about — and it’s not “contraception,” although the word does begin with a “C.” It’s the future of “capitalism” and whether it will be shaped in America or somewhere else.

Rothkopf argues that while for much of the 20th century the great struggle on the world stage was between capitalism and communism, which capitalism won, the great struggle in the 21st century will be about which version of capitalism will win, which one will prove the most effective at generating growth and become the most emulated.

“Will it be Beijing’s capitalism with Chinese characteristics?” asks Rothkopf. “Will it be the democratic development capitalism of India and Brazil? Will it be entrepreneurial small-state capitalism of Singapore and Israel? Will it be European safety-net capitalism? Or will it be American capitalism?” It is an intriguing question, which raises another: What is American capitalism today, and what will enable it to thrive in the 21st century?

Rothkopf’s view, which I share, is that the thing others have most admired and tried to emulate about American capitalism is precisely what we’ve been ignoring: America’s success for over 200 years was largely due to its healthy, balanced public-private partnership — where government provided the institutions, rules, safety nets, education, research and infrastructure to empower the private sector to innovate, invest and take the risks that promote growth and jobs.

When the private sector overwhelms the public, you get the 2008 subprime crisis. When the public overwhelms the private, you get choking regulations. You need a balance, which is why we have to get past this cartoonish “argument that the choice is either all government or all the market,” argues Rothkopf. The lesson of history, he adds, is that capitalism thrives best when you have this balance, and “when you lose the balance, you get in trouble.”

For that reason, the ideal 2012 election would be one that offered the public competing conservative and liberal versions of the key grand bargains, the key balances, that America needs to forge to adapt its capitalism to this century.

The first is a grand bargain to fix our long-term structural deficit by phasing in $1 in tax increases, via tax reform, for every $3 to $4 in cuts to entitlements and defense over the next decade. If the Republican Party continues to take the view that there must be no tax increases, we’re stuck. Capitalism can’t work without safety nets or fiscal prudence, and we need both in a sustainable balance.

As part of this, we will need an intergenerational grand bargain so we don’t end up in an intergenerational civil war. We need a proper balance between government spending on nursing homes and nursery schools — on the last six months of life and the first six months of life.

Another grand bargain we need is between the environmental community and the oil and gas industry over how to do two things at once: safely exploit America’s newfound riches in natural gas, while simultaneously building a bridge to a low-carbon energy economy, with greater emphasis on energy efficiency.

Another grand bargain we need is on infrastructure. We have more than a $2 trillion deficit in bridges, roads, airports, ports and bandwidth, and the government doesn’t have the money to make it up. We need a bargain that enables the government to both enlist and partner with the private sector to unleash private investments in infrastructure that will serve the public and offer investors appropriate returns.

Within both education and health care, we need grand bargains that better allocate resources between remediation and prevention. In both health and education, we spend more than anyone else in the world — without better outcomes. We waste too much money treating people for preventable diseases and reteaching students in college what they should have learned in high school. Modern capitalism requires skilled workers and workers with portable health care that allows them to move for any job.

We also need a grand bargain between employers, employees and government — à la Germany — where government provides the incentives for employers to hire, train and retrain labor.

We can’t have any of these bargains, though, without a more informed public debate. The “big thing that’s missing” in U.S. politics today, Bill Gates said to me in a recent interview, “is this technocratic understanding of the facts and where things are working and where they’re not working,” so the debate can be driven by data, not ideology.

Capitalism and political systems — like companies — must constantly evolve to stay vital. People are watching how we evolve and whether our version of democratic capitalism can continue to thrive. A lot is at stake here. But if “we continue to treat politics as a reality show played for cheap theatrics,” argues Rothkopf, “we increase the likelihood that the next chapter in the ongoing story of capitalism is going to be written somewhere else.”

Fed chairman Ben Bernanke is encouraged by economic improvements, but unconvinced over strength of US recovery

Larry Elliott,
economics editor
guardian.co.uk

Sunday 25 March 2012

It all started when stock markets around the world tumbled in October 1987. After seeing the Dow Jones index fall by more than 500 points in a single day, the-then chairman of the Federal Reserve cut interest rates to shore up the stock market. It did the trick. Confidence returned, Wall Street rallied and so was born the idea of the "Greenspan put" – when times got tough the Fed could always be relied upon to ride to the rescue.

The Greenspan put was deployed in a more serious crisis in 1998, when the hedge fund Long Term Capital Management went belly-up, a move that ensured that the wild dotcom boom of the late 1990s continued for a further two years. When the internet bubble collapsed under the weight of absurd valuations and falling profitability, Wall Street expected Greenspan to deliver, and once again he did not disappoint.

Interest rates were slashed to 1% and left there for a year, creating the conditions for a housing boom the like of which the United States had never seen. Eventually, the Fed did start to tighten policy, but too little too late.

Greenspan has long retired, but the Fed's policy has not changed. The biggest bubble in history led to the biggest bust in history and the biggest policy response in history. Zero interest rates, electronic money creation, manipulation of the money markets: you name it, the Fed under Greenspan's successor, Ben Bernanke, has tried it.

The strategy appears to be working, after a fashion. Activity in the world's biggest economy is picking up and unemployment has started to come down. Compared with Europe – which is not saying much, admittedly – the US is doing OK. In the financial markets, there is growing confidence that America's recovery is for real, and a lively debate about whether the Fed needs to start to thinking about withdrawing some of the stimulus it has provided. Bond yields – the interest rate paid on government bonds – have been rising in the past few weeks, an indication that financial markets believe stronger growth will force the Fed into taking pre-emptive action against inflation.

There are three schools of thought about the US economy. In the first there are the doves, who believe that policy should be kept ultra-loose for years to come. They are led by Bernanke, who, as a student of the Great Depression and Japan's "lost decade" in the 1990s, is alive to the risk that tightening too quickly and too aggressively can tip countries back into recession. That was what happened in the US in 1937 and on many occasions in Japan during the 1990s and early 2000s. As things stand, Bernanke would be happy to see the Fed's key policy rate remain at virtually zero for the next 2½ years.

The Fed chairman is modestly encouraged by recent developments in the US economy, which has seen jobs created, a floor put under the housing market and a pickup in factory output. But he remains unconvinced about the strength and the durability of this recovery, not least because something similar happened at the end of 2010 and the start of 2011. There remains a lot of slack in the US labour market. In the past five years participation rates have fallen, the number of discouraged workers has increased, and under-employment - those working part-time but want to work full time – stands at 15%.

For the time being, Bernanke commands a majority on the Fed's open market committee that sets policy. But a smaller faction – the hawks – believes the recovery is for real and that the Fed will regret its laid-back approach if inflation lets rip over the next few years. This group says it is worried about repeating Greenspan's mistakes.

A paper being presented to the UK Royal Economic Society annual conference this week argues that this policy error – mirrored elsewhere in the west – caused the global financial crisis, since it resulted in a search for investments that paid higher interest. This, in turn, led banks to soften the requirements for borrowers, the upshot of which was the sub-prime mortgage boom. The study by Manthos Delis and his colleagues at the Cass Business School at City University concludes: "Our results are all the more striking as the present stance of the Federal Reserve is to maintain ultra-low interest rates in an attempt to resurrect the sagging US economy. Central banks should consider the possible adverse effects of their loose monetary policies on bank risk-taking."

The doves and the hawks are also slugging it out over the US budget deficit. Doves want to delay action to repair America's public finances; indeed some, like Paul Krugman, say that Barack Obama's economic and political problems stem from his failure to provide a big enough stimulus. Hawks, like all the Republican candidates for the White House, say that too much government spending is "crowding out" the private sector, thus stifling recovery.

Where a dove like Bernanke would agree with a hawk like Mitt Romney is that the US can return to its former economic glory provided the right policies are used. This rests on a number of assumptions: that America remains a powerful economy, that it is a world leader in a number of sectors, and that it has a history of re-inventing itself, thereby confounding those who write it off. All of that is true. Yet there is a third way of looking at the US economy. Yes, it has bounced back from difficult periods, but the picture over the last few decades is that a bigger and bigger stimulus is required to produce a growth spurt. What's more, the upswings have been weaker than in the 25 years after the second world war, and have been accompanied by larger trade deficits and the relentless hollowing out of manufacturing. In his new book*, Thomas Palley notes that there has been a marked difference in the growth paradigms before and after 1980.

Prior to that date, when the economy grew so did the incomes of the American middle class. Everybody gained from productivity improvements, and in the good times manufacturing employment rose and the trade deficit was negligible. After 1980, the gains from productivity were monopolised by those at the top, manufacturing employment fell even during upswings, while the boom of 2001-07 was the weakest in postwar history. Palley notes that the post-1980 growth paradigm "involved squeezing worker incomes, squeezing household saving rates, raising debt levels, persistent asset price inflation in excess of consumer price inflation, and reliance on ever lower nominal (ie not adjusted for inflation) interest rates".

This is a sobering but accurate conclusion. For a while America's weaknesses were masked by asset price bubbles, cheap imports, financial innovation, and cheap money. But there are limits to how high debt levels can go and how low interest rates can go. The desperate attempts by the Fed to kick-start the economy show that these limits have been reached. In that sense, the debate between the doves and the hawks is irrelevant. A more interesting debate is whether America's growth model is a turkey.

*Thomas Palley: From Financial Crisis to Stagnation, Cambridge University Press